Thursday, 09/13/01
Dr. Schwab mentioned in class that making the distinction between a change in quantity demanded and a change in demand is one of the trickiest things covered in the earliest part of the course. I think calling them quantity demanded and demand make it even trickier than it needs to be since they sound so similar. From here on out, I will instead use two phrases that I use when I think about this:
Demand curves, demand schedules, demand functions all tell you basically the same thing: At a certain price, how much do you want to buy? The only difference is how this idea is represented - a curve is a graph, a schedule is a table, and a function is... well... a mathematical expression. Anyway, no matter how you want to depict it, you're getting this same basic thing:
If I give you a price, you can run that price through the demand machine and the machine will spit back a quantity that you want to buy. The machine here represents how much you like the thing being bought and also how able you are to afford it. Notice that if I give you a different price, the machine does not change. All you do is take that different price and run it through the same machine (and probably get back a different quantity demanded).
Demand, then, is a rule that tells you how much you want to buy if somebody gives you a price.
Suppose we're looking at a fairly ordinary good that obeys the law of demand, say cookies. If somebody gave me a price, I could tell them how many cookies i'd want to buy. Since the law of demand holds, I want to buy less when the price is high and I want to buy more when the price is low. Suppose my demand for cookies is represented by the following demand curve:
What does it mean to be downward sloping? This means that as you go left to right on the graph, it starts high and goes down until it hits zero. A downward sloping demand curve satisfies the law of demand since at high prices (P=5) I want very few cookies (Q=0) while at low prices (P=1) I want a lot of cookies (Q=24).
If you give me P=2, I can run it through my demand curve and tell you that my quantity demanded is Q=21. If you give me P=4, I can run it through my demand curve and tell you that my quantity demanded is Q=9. When I get the new price, does that have anything to do with how much I enjoy eating cookies? Nope. Does the price have anything to do with how much money I have? Nope. So is there any reason to believe the demand curve changed? Nope. When someone gives me a new price, all I need to do is feed it into the existing demand curve and out pops the quanitity demanded.
Suppose I took that demand curve machine and replaced it with a new one. If I run the same price through the new machine, will the new machine spit out the same quantity demanded as the old machine? Probably not. In fact, almost certainly not. Let's suppose for some reason, I change my mind and all of a sudden I enjoy eating cookies more.
Does how much I enjoy eating cookies have anything to do with my demand curve? Of course. My demand curve is determined by how much I like it and how much money I have! Before my tastes changed, I used to want Q=21 when the price was P=2. Now that I like cookies more, will I buy more, less, or the same amount at P=2? Naturally, I will buy more at P=2. Before my tastes changed, I used to want Q=16 when the price was P=3. Now that I like cookies more, will I buy more, less, or the same amount at P=3? Just like the P=2 case, I will buy more when P=3.
In fact, I will buy more than before at every price. This can be seen in the graph above. The pink shows my demand curve before my tastes changed and the green shows my demand curve after my tastes changed. Notice that at every price, the quantity demanded is higher on the green curve than on the pink curve. This makes sense because you would expect someone that likes cookies more to buy more at any price.
Now the punch line for Shifts in Demand Curves: did you need to tell me the price of cookies for me to know that my demand curve shifted? Nope. All I needed to know was that I liked cookies more - I needed to know that my tastes changed. The way you can tell whether we are talking about a change in quantity demanded or a shift of the entire demand curve is to look at what's different:
Suppose cookies are a normal good. Then when my budget goes down, I will buy less of them at any price level. A budget decrease might have the following effect on my demand for cookies:
Here, my entire demand curve has shifted left from the pink original to the lower blue curve.
Oh yeah, in case anyone was wondering, the function I used as the original pink demand curve in all three sections was Q = 25 - P^2.